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NZ headed for a nasty cycle of higher wages and higher costs: Economists


The number of people in jobs has risen for 13 months in a row, and bigger wage rises are not far away as life continues to get more expensive, economists say.

ANZ senior economist Miles Workman​ and economist Finn Robinson​ said job numbers were up in spite of ongoing Covid restrictions.

“With the cost of living rising while the labour market tightens, stronger wage growth should be just around the corner.”

Last month, an extra 4575 more jobs were filled, up 0.2 per cent on December 2020, Stats NZ said on Monday. Construction jobs were up 8.3 per cent, with an extra 15,430 positions filled, and professional, scientific and technical services jobs were up 8.5 per cent, with an extra 14,792 positions.

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Job numbers also rose in retail, healthcare and social assistance, and public administration and safety. The number of filled jobs in primary and goods-producing industries fell.

Low and stable inflation over the past decade meant wages had also remained steady, with employers basing pay rises on what inflation had been over the previous year, ANZ economist Finn Robinson said.

Bigger wage rises are not far away as life continues to get more expensive, economists say.

BRADEN FASTIER / STUFF/Nelson Mail

Bigger wage rises are not far away as life continues to get more expensive, economists say.

However, with annual inflation jumping last year, to 5.9 per cent in the December quarter from 4.9 per cent three months earlier, almost double the Reserve Bank’s target band, the system was not keeping pace.

“So those gradual wage increases actually mean that your real wages are falling quite quickly, as that wage negotiation process takes some time,” Robinson said.

Wages rises would begin to take off over this year.

“We haven’t really seen a labour market this tight on record in data that goes back to the 1980s, so we do expect them to accelerate. How far and how long, it really depends.”

Widespread locally generated price rises, on top of inflation determined by international markets, would ratchet up the pressure on employers to pay more.

“That’s a really big driver of wage growth as well because people need to be compensated for the rising cost of living. If that increase in domestic inflation pressure continues, then we could see wage pressures building quite considerably over most of this year,” he said.

Firms were taking a hit on productivity due to Covid, with extra costs, while still paying workers.

“So when they see higher wages come through, because they’re not getting more output per worker they actually have to pass those costs onto consumers, and then that means if you’re a worker you then see your costs going up as well, so you demand higher wages.

“So you’ve got this nasty cycle where higher wages lead to higher prices, which then lead to higher wages especially in a labour market this tight.

“It basically means that inflation’s going to be a lot harder for the Reserve Bank to get ahead of.”

Robinson said the sheer strength of employment despite Covid restrictions pointed to unemployment falling to 3 per cent, which would be a record low for the Household Labour Force Survey which dated back to 1986, he said.

Unemployment in the three months to the end of the September slumped to 3.4 per cent, down from 4 per cent three months earlier.

“You have to go back to historical estimates from NZIER to see unemployment lower than that back in the early 1980s. So we’re getting into relatively uncharted territory.”

On Monday, Stats NZ monthly employment indicators showed the young had the biggest jump in filled positions, with a 14.1 per cent increase in jobs for 15 to 19 year-olds, followed by people aged 30 to 34, up 5.3 per cent.

More women than men found work, up 4.2 per cent and 3.5 per cent respectively. Waikato had the biggest percentage jump, up 4.7 per cent or 10,141 jobs for the month.

Actual gross earnings for the month were up 10.4 per cent to $13.8 billion.

The number of enterprises rose by 8649 to 565,050 in December 2021 from a month earlier.

Stats NZ releases its December quarter labour market statistics on Wednesday.

Kiwibank economists said annual inflation at a 31-year high, up from 1.5 per cent at the start of last year, meant households were seeing their real incomes erode, as wage growth could not keep up with the rapidly rising cost of living.

They expected the highest wage growth seen in more than 12 years when Stats NZ releases the labour cost index on Wednesday, forecasting a 2.8 per cent increase in the December quarter on a year earlier. That would be well below the nearly 6 per cent inflation rate in the quarter, but heralded further wage growth.

“To be fair, the labour market is a lagging indicator and wage inflation will continue to rise over much of 2022. It’s clear that the labour market is as tight as it gets. Firms are finding labour scarce. And with inflation hitting multi-decade highs, wage growth will naturally rise.”

They expected the Reserve Bank to increase the official cash rate at every meeting in 2022, lifting the benchmark rate to 2.50 per cent by Novermber, six months earlier than previously thought.



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